Indifference Curve – Combination of 2 entity’s yielding the same amount of satisfaction.
Two English Economists J.R. Hicks and R.G.D Allen in their now well-known paper ‘A reconsideration of the Theory of Value’ severely criticized Marshall’s Cardinal utility analysis based upon Cardinal measurement of utility and put forward the indifference curve approach based on the notion of ordinal utility to explain Consumers behavior.
One Unit will give less satisfaction; more units will give more satisfaction.
Marginal Rate of Substitution
The concept of the marginal rate of substitution is an important tool for the difference curve analysis of demand.
The rate at which Consumer is prepared to exchange goods X and Y are known as the marginal rate of substitution.
The marginal rate of substitution of X and Y represents the amount of Y which the consumer has to give up for the gain of one additional unit of X so that his level of satisfaction remains the same.
The following two are the reasons responsible for the diminishing marginal rate of substitution.
1. Good are imperfect substitutes of each other.
Ex- Orange cannot substitute Apple, even they are both are fruits.
2. Every want is sustainable in nature, so there will be a time when this level reaches a maximum and there is saturation.
Ex – 1:1 is a saturation level
Properties of Indifference Curve:
1. Indifference Curves slope downward to the right.
Explanation – It is bound to decrease because when the amount of one good in the consumption is increased, the amount of the other good is reduced.
- The Indifference curve cannot be in a straight line because a straight line means that as the amount of good X was increased, while the amount of good Y remains the same, which is not possible.
- Indifference Slope can not slope upward as it means the amount of both the goods are keep on increasing simultaneously which is not true in IC.
2. It is convex to the origin.
Explanation – This is because The Marginal Rate of Substitution of X for Y diminishes as more and more of X is substituted for Y.
3. The Indifference curves can not intersect each other.
Explanation – The two indifference curves cutting each other lead us to an absurd conclusion of A being equal to B in terms of satisfaction.
We, therefore, conclude that the indifference curves can not cut each other. (A & B are 2 points on 2 curves)
4. A Higher indifference curve represents a higher level of satisfaction than a lower indifference curve.
Exception in IC- The Indifference Curve can be in a straight line only when the goods are perfect substitutes for each other. In this case, the consumer succumbs or monomania that’s why he would buy and consume only one good.
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